I may have discovered “the Fed Model” in March 1991– long before Ed Yardeni gave it that name after July 22,1997. The relationship between the inverted P/E ratio and bond yields was first depicted in the letter below to consulting clients (institutional investors), where I probably should have labeled it the “Reynolds Model.”

I agree with Estrada that it did not work very well before August 15, 1971, when the last remnants of the gold standards were abandoned. The gold standard did not permit the extreme gyrations in bond yields we have seen between Fed Chairmen Volcker and Bernanke. Relatively steady bond yields of 2-5 percent from 1789 to 1970 under a gold standard obviously tell us little about stock market booms and busts at that time. Contrary to Hulbert and Estrada, however, the U.S. relationship between the e-p ratio and the 10 year bond yield remained remarkably tight from 1970 to 2008. From 1988 to 2008, the e-p ratio averaged 4.9 and the 10-year bond averaged 6 percent.

Mr. Ryan broke into politics in the 1990s at Empower America, where he became a protégé of former Buffalo Congressman Jack Kemp, the pro-growth, pro-trade, pro-immigration leader of the GOP during the Reagan revolution and into the 1990s. Kemp understood, as Mr. Ryan also does, that while spending restraint is important, faster economic growth is a precondition to averting a fiscal impasse. More than anyone else in Washington in recent years, Mr. Ryan has adopted the Reagan-Kemp message.

At Empower America, Mr. Ryan worked with Kemp on issues ranging from enterprise zones for inner cities to school choice. Like Kemp, Mr. Ryan has always made a case that free-market policies benefit minorities and poor people generally who are “capital deprived.” That message has special resonance now given the reversal of minority progress on income growth, and the high black and Hispanic unemployment rates, during the Obama years.

I’ve long been a big fan of Paul Ryan, so I am thrilled with Romney’s VP choice. The Romney-Ryan ticket represents the single best hope for reforming our runaway government and reviving our sickly economy. If the people do not respond to this overwhelmingly in November, then the future of our country will be in serious doubt.

UPDATE: For a fairly comprehensive look at the origins of Paul Ryan’s approach to policymaking, see this article by John Podhoretz.

The euro has ‘passed its youth with flying colours,’ is a world currency par excellence and has great future as an international reserve asset

FP COMMENT:Paul Krugman and others are now claiming that your original paper, “The Theory of Optimum Currency Areas,” required labour mobility and fiscal union. Europe didn’t have either; therefore the euro was a mistake.

MUNDELL: My argument for Optimal Currency Areas said nothing about fiscal union. Very few countries in the world have a fiscal union. It would be almost impossible for a large country to have a complete fiscal union. Canada and the United States do not. In the United States, the central government spends maybe 22% of GDP while total government spending is about 37%. Every country’s fiscal structure is different, depending on the way in which spending and taxes are divided among the federal government, the state or provincial government and the municipalities.

A fiscal union is not a prerequisite for a monetary union. The argument that monetary unions require fiscal unions is a recent idea based on new functions of government to give assistance to specific economic groups hit by asymmetric shocks. This kind of specific relief to hard-hit segments would be better carried out at the federal government level, as in the U.S. or Canada, rather than the local level. But it does not require fiscal union in any comprehensive sense.

Historically, monetary unions have been established in ancient empires and nation states without regard to fiscal union. Even after the U.S. consolidated state debts into a national debt in 1792, states were sovereign with respect to debts and deficits. When several defaulted in the 1840s they were not bailed out and nobody imagined that the problem had anything to do with the U.S. monetary union.

This is not to say that Europe might not be better off with a redistribution of functions from the nation-state to the “federal” level, including defense and social security unification. But if these shifts of responsibility are made along with corresponding shifts in the powers of taxation, they should be made on grounds of efficiency and economic justice, not on grounds that they are necessary for monetary union.